Emerging markets weaker; spreads widen, but pricing mostly steady; newer Iraq bond improves

By Rebecca Melvin

New York, Aug. 17 – Emerging markets were generally weaker on Thursday with wider spreads as U.S. Treasuries rallied for a second straight day.

“We are wider on the day marginally and lower in some credits as a function of Treasuries being stronger,” a New York-based market source said.

In Latin America, spreads were wider almost across the board, including Argentina, Colombia, Peru and Venezuela, but pricing was little changed, the source said.

Venezuela credit was “fading.” Petroleos de Venezuela SA’s 8½% notes due 2017 were seen trading at 90.5 and lower. That was down from earlier in the week, but still higher compared to 85 bid, 86 offered at midweek a week ago.

In the Middle East, Qatari banks were wider after a Bloomberg report that the government has asked the banks to line up international financing as a liquidity squeeze begins to be felt related to the cutoff in diplomatic and trade relations between it with the Saudi Arabia-led group of Gulf nation neighbors including the United Arab Emirates, Bahrain and Egypt. But the Republic of Iraq was tighter on Thursday, with the Iraq 6¾% notes due 2023, of which $1 billion priced on Aug. 2, indicated at 100.62 bid, 101.12 offered, with a spread that was tighter by about 15 basis points.

The emerging primary market was very quiet. There was a Regulation S deal priced by China developer CK Infrastructure Holdings Ltd. for $500 million of perpetual capital securities. The CK deal was issued by Phoenix Lead Ltd., and the securities have a 4.85% coupon and are non-callable for five years.

But the only other issue mentioned when discussing the primary market was Jamaica’s tap of its 6¾% notes due 2028 and 7 7/8% notes due 2045, which debuted on Wednesday. Both Jamaica tranches, for a combined $869 million of new notes, traded “a fair amount,” and remained higher Thursday afternoon compared to the tap prices set late Tuesday.

Elsewhere, the Central & Eastern European, Middle East and Africa regions were quiet in the primary, a London-based market source said.

Global stocks were down, major U.S. stock indices fell by more than 1%, and U.S. Treasuries were up. The yield on the benchmark 10-year Treasury note fell to 2.197% on Thursday, compared to 2.224% on Wednesday.

The European Central Bank released minutes from its July 19-20 meeting, and like the minutes of the U.S. Federal Reserve open market policy meeting minutes released on Wednesday, ECB policy makers expressed concerns about weak inflation rates. The members were also concerned about the euro becoming too strong and decided against a change in forward guidance at the July meeting that might have pushed the currency any higher.

In Qatar, the government was reported to be telling banks to tap international investors for financing instead of relying on the government due to the ongoing Saudi-led boycott that is putting pressure on liquidity.

Qatar Islamic Bank SAQ recently raised financing in yen and Australian dollars through private placements, and Commercial Bank QSC sent a request for proposal for a dollar loan for at least $500 million, according to Bloomberg.

ECB members expect interest rates to remain at current levels for an extended period and well beyond the term of its ongoing net asset purchase program. Investors will be watching closely remarks delivered by ECB president Mario Draghi next week at the Kansas City Federal Reserve’s annual conference in Jackson Hole, Wyo.

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